Colabor Group Inc.

Thank you, good morning everybody. Welcome to Colabor Group's third quarter results conference call.

I’m Pierre Gagné, I’m the Senior Vice President and Chief Financial Officer as well as currently the Interim Chief Executive Officer. Yesterday, we issued our earnings press release, it can be found along with our financial statements and MD&A on our website and on SEDAR.

As you’re aware, Colabor has seen some changes to its leadership during the last two months. Following Lionel Ettedgui resignation, we appointed Mr.

Briscoe, our shareholder and accomplished food distribution entrepreneurand then myselfto take over the interim. Mr.

Briscoe remains on the board and has made himself available to support our team.There has been no further changes to our leadership team and everyone at the executive level remains dedicated to executing our transformation plan. Our Board of Directors is also actively engaged in this executive search process and it’s advancing well.

We will communicate any updates. Concurrently with the recent changes to our leadership, we announced the expansion of the option to purchase Dubé Loiselle for a period of 90 days following the nomination of the new full-time CEO.

During the last 15 months, Colabor has implemented a transformation plan that aims to improve our competitive position and profitability. This plan revolves around three pillars.

The first one grow our broad line distribution activities, the second one integrate and optimize our business units and thirdly reduce the level of debt. Since starting this plan, we have successfully executed several initiatives that have driven results over the last few quarters.

More important -- most importantly, we improve our customer mix and profitability by not renewing non-profitable contracts. We grew our street business in Quebec, and we sold Viandes Décarie allowing us to reduce our debt.

Yesterday with the release of our financial results, we concurrently announced a mutual agreement to early terminate our supply agreement with Recipe Unlimited, which has been weighing significantly on our past year’s financial and operational results. With our decision to concentrate on profitability, growing our broad line distribution activities and optimizing all our business units, we took the necessary decision to negotiate the early termination of this logistic contract.

We're very pleased with the outcome and with our customers collaboration. We will gradually stop servicing this contract until March 2020.

There are no penalties associated with the end of this contract, and no liabilities will remain after this termination. Initially entered in 2007, the contract with Recipe was renewed in 2015 and currently generates annual sales of approximately $255 million and represents approximately a negative adjusted EBITDA of $4 million, when you look at it on an annual basis.

Over the next five months as we gradually see supplying the Recipe banners, we will be evaluating various alternatives and opportunities to strengthen our operations in Ontario and leverage our existing resources. Depending on the various alternatives that we are currently evaluating, it can be reasonably expected there will be restructuring costs in the amount of $8 million to $9 million.

Now I want to underline that in the near-term, these restructuring costs will be essentially paid for by the realization of Recipe inventory and accounts receivable net of related accounts payable. Under the termination agreement where Recipe will purchase the remaining inventory on March 31, 2020.

We also believe that this is an opportunity for us to refocus and strengthen our activities in Ontario by improving our ability to serve our existing customers and grow our broad line business with smaller-end dependents. This contract termination frees up important human and financial results -- resources my apologies.

In the coming months, we will dedicate these resources to further optimizing our distribution centers use only our newest state-of-the-art refrigerated trucks and trailers that provide better quality control and on-time delivery, leverage our experienced drivers and customer representatives and finally improve our overall responsiveness. In the coming quarters, we will work to manage the effect of the loss of volume on this business units profitability and constantly evaluate the effectiveness of our optimization measures.

We believe that starting in the second half of 2020, our objective is to be in a position to start delivering margin improvements and rise this business units contribution to our Group’s operating profitability. And now for a review of our financial results for the 84 and 252 day periods ended September 7, 2019.

Our results for the third quarter have progressed as planned from the continued implementation of Colabor’s transformation plan. Consolidated sales were down by 1.5% or $4 million in the third quarter to $261.5 million.

Sales in the Distribution segment decreased by 2.2%. Although we experienced growth in the Specialty distribution activities of fish and seafood, this was offset by lower volume in Ontario and from our decision to concentrate on more profitable routes in Quebec and the Maritimes.

Sales in the Wholesale segment increased by 1.8%. Our new targeted sales strategies started generating good results in the recent months and contributed to revenue growth which was slightly mitigated by the original effect of the non-renewal of non-profitable contracts.

Adjusted EBITDA for the third quarter reached $6.2 million to decrease of $600,000 compared to the corresponding period of 2018. If we factor in the reversal of $1.1 million of provision that took place in the third quarter of last year, we have an improvement in the adjusted EBITDA of 8.5% year-over-year.

Net earnings from continuing operations stood at $1.6 million, up almost double compared to the corresponding quarter of 2018. This improvement stands from lower net earnings in the third quarter of 2018 from a $2.4 million impairment loss, from a $2.4 million of impairment loss and from a $1.2 million in cost not related to operations.

For the same reasons, net earnings for the third quarter reached $1.7 million or $0.02 per share compared to $1.2 million or $0.01 per share for the corresponding period of last fiscal year. Cash flow from operating activities amounted to $21.2 million during the third quarter compared to $10.9 million for the corresponding periods of 2018.

This increase is mainly due to a lower use of working capital. As of September 7, 2019 the company's total debt including convertible debentures and bank indebtedness amounted to $81.6 million down $33.8 million from 12 months ago.

The net proceeds from the sale of the Viandes Decarie division and the increase in cash flow from operating activities have allowed the reimbursement of $5 million of subordinated debt and the reduction of the amount of outstanding on the credit facility. Our total debt to last 12 months adjusted EBITDA ratio now stands at 4.3 times, which is down sequentially from the second quarter of 2019, when the ratio stood up five times and down significantly from the equivalent quarter last year, when the ratio stood at 6.8 times.

Now if we exclude the convertible debentures, this ratio now stands at 1.7 times versus 2.5 times in the second quarter of 2019. That concludes my initial remarks and I would like now to turn the call over to the operator for the Q&A period.

Hi Pierre. I was wondering if maybe you could clarify, again how much EBITDA the Recipe contract was generating and what the impact was on the EBITDA margin?

Well the contract as we said in the press release generated a negative EBITDA of $4 million with sales of $255 million. So $4 million that's on a yearly basis.

Okay. So I guess like going into this contract did we know -- did you guys know that it would be I guess a negative EBITDA contributor and I guess if so, do you know what the rationale was?

Well, it's been I don't want to deflect your question is just I don't know when do you took the contract. If you want the rationale behind it, I could just tell you that as we went through the process this year of looking at as we said is optimizing our business we look at, if you remember Lionel was doing that and we continue to do that is to look at our contracts and see what makes sense for the company.

And I cannot comment as to what was done in the past, I just could tell you that when we did our analysis, we concluded that this contract on our business was draining resources. So with the collaboration of Recipe, we came to the conclusion it was better for everybody to move on.

And as far as we're concerned is, I cannot go back and try to determine what was done or not, I have to look at what it is, it's a contract as you know that there is still three years to go with an option of two years left after that at the Recipe’s desire and we felt that we couldn't continue and it was better off to move on. So I don't want to judge or qualify how it was done in the past.

We look at what it is today and move on.

Okay, thanks for that. But I mean, I understand how it could be unprofitable but what happens to like your route and client efficiencies when you lose $255 million in annual volumes.

And I guess how do you expect to recoup those volumes and I guess get that $4 million in EBITDA back?

Well, as we've looked at the route before we made that decision, we're of the view with the plan that we put in place, that this $4 million should not longer subside, as we've said in the press release in the second half -- starting the second half of 2020. So as we go along, the plan is already in place to re-affect if you want to readjust these routes.

So despite that, I guess, so I guess we should be modeling a drop in volumes but an increase $255 million in sales roughly and expect $4 million bump to your EBITDA starting in the second half of 2020?

Yes, but I would just caution you not to it's not day one, it will start gradually as we go along and reach a late 2020 probably or more likely early 2021 that we will be at the more at a cruising speed, if I may put this way to improve the EBITDA. It won't happen, if you want the first day of Q3, I think we have to be cognizant at that time.

Okay. Still on the distribution business, I guess I'm going back two quarters.

You guys did have two quarters of margin expansion and that that was no longer the case in Q3 and I don't know if you add back the $1.2 million reversal in that segment particularly and even at that year, you would be flat year-over-year in terms of the margin, just wondering what was driving the margin compression there and why it was either negative or flat versus being up in the first two quarters?

Good question. I wouldn't use the word margin compression, I think is, as we've said in the past, Derek is that every quarter has its situations.

As you rightly pointed out, last year, there were some one-time favorable adjustments, when you factor that out of the equation, the EBITDA margin is essentially flat with last year so for that segment, so to me is that we cannot look at one specific situation for one quarter, we're working towards improving the margin quarter-over-quarter. And that's what's happening.

There's nothing more specific in this quarter. I think we did very good cost reduction in that segment of the business adjusting it with our revenue coming down.

Sometimes it's not coming at exactly the timing may not be exactly perfect. But this is what we're aiming at.

Okay. And I guess like in your prepared remarks and in the MD&A, you had spoke to a desire to refocus the broad line distribution on more profitable niches.

Could you maybe just add some color to what those niches would be?

Yes, so one element that we need to focus much more is in the Street business. And I'm assuming you're referring to Ontario right now.

The Street business is something that we need to really address and spend a lot of time and this is what we've started to do this summer. And that's what will be focusing, of course, for the future.

Because the Street business is higher margin, as you know.

Yes, all right. Maybe just switching gears to the wholesale business.

It looks like it was a good, it was a decent quarter. I was just wondering what were the drivers in the Wholesale segment this quarter?

Yes, what we're focusing now is and it's been successful and the sales team has very good strategy is to what we call the all-in, all-out strategy in Quebec where the smaller, I’m sure you want the smaller client base now are buying much more from our business. And we did some great strides on that segment with the strategy that we put forward.

Yes, maybe could you just clarify what that is, the all-in, all-out?

Okay. The clarification of that for people on the call is that what we're trying to do is not just trying to for a specific customer is not to sell specifically or the customer not just coming for specific product because we have a better pricing, but try to offer a pricing for their complete.

If you want them to satisfy their full needs and aiming towards that. So what it does is that you get a better share of wallet from these customers.

So we saw some great progress with many customers. And we've been working at it now for few quarters.

And of course things sometimes take time. But it seems to be working and our customers seems to be very pleased with this.

If you want new feature, a new option for them.

Is that what you mean by when you said that you targeted or that improvement was due to a targeted sales strategy?

I wouldn't use a targeted sales strategy but I think that when you sit down with a customer and trying to find out what are their needs and how you go, how do you go about it and not just sell like if you have a product either is the lowest price and then you buy it from you, but goes to somewhere else to buy product B is how could you organize your situation or organize your setup with the customer that he could purchase essentially all of its product directly to with Colabor. And it's a win-win, win in the sense that it's easier for the customer in terms of logistics, and for us it still make a profitable venue to do that.

That's why you saw the sales coming up. And it's starting to take to take strides.

So I think we're progressing well on that front and the team, the sales team is very, very excited about that.

Okay, I just want to I guess, I want to still get clarification on how you expect to fill-in or recover from a loss of a significant loss in volumes on the distribution side? I thought…

What you mean -- I’m not sure, I understand to recover is. I think you should look at it more as to right size it or to shrink it to make money.

I think that that's what it should be looked at. The team in Ontario, I mean understands the situation, they knew that this contract was not profitable.

And the management both in Ontario and here understood the situation. And we think it's going to be beneficial for shareholders over time.

So in the last 15 months, if you look for example by not renewing certain contracts in Quebec as well, it has helped us by reorganizing our operation to improve our profit. So I think you should look at that along the same path.

There's nothing very different in that scenario than it is. Now when you’re losing $4 million of EBITDA that's the $4 million you don't have to invest elsewhere in your business if need be or reduce that.

So we think that as we sat down and look at that, as a management team, that it was the better scenario. Of course we would have liked to keep and continue with Recipe, should it have been profitable for us.

So it's not an easy decision to make. But it's a decision for us that that we needed to make in order to achieve the objective of improving results.

Okay, so maybe if I maybe if I asked the question in a different way. So after you right size the business at some point, I guess you would expect that you would have to go out and get organic sales growth?

I'm sorry, it's going to be done at the same time. It's not sequential.

So it's not because we right size on one side that we wait until we’re right sized to start selling. So these two things, it's the focus has been there, but the focus is going to be amplified to do so.

So I just want to outline that, it's not sequential, it's together.

So right now, are you driving organic growth in your base business?

We do, yes we do.

Okay, can you and I guess what?

We haven't disclosed. I don't want to get into this specific or selective disclosure in these statements that we do grow the business.

Okay. One final one for me.

Then I actually have two more. In your search for a new CEO.

I guess I'm wondering on, whether or not the strategy continues as is or do you expect changes or I guess, what are the criteria that you're looking for in new leadership?

As you will appreciate Derek, I’m not a candidate for one and for two. The board hasn’t -- asked me to decide on what type of candidate but let’s put it this way.

This strategy that Lionel put forward is continuing. Yesterday the board with Recipe haven’t heard or seen any changes maybe with the new CEO, there may be some tweaks, I don't know we'll have to see.

Our strategy over time evolve a strategy over time could take a tweak here and there but the main objective is still the same, grow our broad line, reduce debt and be more efficient operator at the end of the day. So, these three pillars are still there.

Now they could take shape or different shades over time, but this will remain for in my opinion for the foreseeable future. I haven't heard anything different from the board yesterday.

Okay, thanks for answering my questions, Pierre.

Well, thank you very much. Thank you.

Thank you. And is there another question?

Yes. Good morning.

Hey, guys thanks for taking my questions. I have a couple of ones.

First one going back to the loss of volumes at the Recipe. You mentioned that you're losing $4 million of EBITDA in the move.

So I'm just wondering strictly on a cash flow basis how much you're losing here?

I'm sorry, how much cash flow, we’re losing. Say that again?

Yes, how much on the cash flow -- from a cash flow perspective how much you're losing here?

Well, if we have a negative EBITDA of $4 million, if I understand your question properly, you would have a $4 million cash flow drain basically essentially not maybe to the penny but they would be very close.

Okay, thanks. When your operations in Ontario, right now, where do you stand at in Ontario, does it still makes sense for you to stay in Ontario after this or you cannot also reviewing the size and scope of your business there?

No, but as I said, there is a plan in place to you saw that there is a restructuring charge. So the restructuring charge is aiming at optimizing with the new volume of the business and that's what's going to be.

So to answer your question, yes we will continue in Ontario. But putting the right resources with the right, put the right customers then which is the remaining business in terms of profitability not that Recipe was not the right customer, they were excellent customer.

But in terms of for us to be profitable, that was the objective for us to now we need to now we're going to work on the right sizing of the operation. We have a plan to that effect.

And we'll communicate it as we go along very shortly, I don't want to commit to a specific date as you know, we have still three months plus to serve the contract and we will serve it appropriately and be responsive to their needs. So for the next three months, there shouldn't be that much of a change in our operation.

Okay. Maybe the last one for me.

Switching gears, have you decided anything regarding the option to buy Dubé Loiselle?

No, as we said, because of this situation, I think it's better off to wait for the new permanent CEO. And you would have 90 days to assess.

Of course we did a lot of work on that front. So it would be essentially to bring him up to speed and see his point of view and then go from there.

So we haven't made any decision. But we would have 90 days post its coming, its venue then we would take a decision.

Okay, maybe very last one. With the sale of Viandes Decarie and the waning down of your business in Ontario.

Do you think you have the right size, you have the right assets right now, you're still reviewing the portfolio of the assets also still?

That's a good question. To us is that there's, there's always things that you may look at, but at this stage, there's nothing to announce.

So I don't want to make any comments on that front. But if there's something to be announced, we would announce it.

But that's as much as I could tell you at this stage.

Okay, that's it from me. Thank you again for taking the time.

Thank you. Thank you for taking the time.

Still another question, operator?

Yes, thanks Pierre. Just one final one for me.

I was just wondering if you know if you still have a long way to go with addressing the unprofitable contracts in the balance of your portfolio?

Well, as you know, I've been here for four months now for five months. I cannot pretend I know all of the context.

So say then except for that. I think we're making great progress with, I would say that the bulk of it is done.

Is all of it done that I cannot say but I would say, we've probably covered now the big one at this stage. But I'll just, I'll just make an exception that I'm new here.

So I do not pretend to know them all. But the big stuff has been, I would say the big -- if you want the big rocks have been moved.

Okay, thank you, Pierre.

Thank you.

Good morning.

Hi Pierre, good morning. Another question on the Recipe contract.

Is there any material difference in the amount of working capital used in the Recipe contract versus the broader kind of overall group average?

That's a good question. Let me yes, it's a bit more working capital than the remainder of our business, a tad more.

I don't have the specific percentage related to them. But I could tell you in terms of day sales outstanding, it's a little bit higher in terms of inventory, it's a bit higher.

But for the payable side, it's not much different than the remainder of our business. So I would say a tad more.

I don't think it's going to move in terms of DSO, day sales outstanding or the DOI, day outstanding inventory. It will move the needle but not by much.

Okay. And other restructuring charges that you're anticipating is, is all that going to be cash or is there going to be some non-cash in there as well?

Those are -- I’m going yes, it's I would say the most part is cash. And as I said during the call, when you look at the working capital that will free up from the Recipe business.

We should be essentially covered with the charge that we're planning to spend in order to terminate or to write-off or to terminate the type of agreements and severances.

Okay. And my last question on Recipe, if you gain back the $4 million in EBITDA that you were losing on the contract, but given you're doing much lower volumes overall, do you lose EBITDA in other areas, just the less fixed cost absorption or is it a straight $4 million will help improve the bottom line?

It looks to us that based on the agreement that -- or sorry based on the analysis that we've done, we won't lose with -- and if you're referring to suppliers rebate or suppliers revenue in your question, this is something we looked at and it's de-minimis in terms of if you want impact. With respect to the fixed charges you refer to by right sizing the organization, it's obvious that we will have to and it’s included in the restructuring charges that we will have to do certain things with fixed charges.

All right. Thank you very much.

Thank you. Well, the operator, I don’t think there's any more questions, operator?

Well, thank you everybody for your questions. Thank you for the continuous listening of our conference call.

I just want to point out that Colabor continues to work with discipline and rigor to continue the transformation plan that we set for 15 months ago. We believe that our recent decision to terminate our supply agreement with Recipe will accelerate our path to higher operating profitability starting later in the second half of 2020.

Until then, we continue to focus our attention on our value-creating niche and growing where it makes sense for Colabor. We have just scratched the surface and there remains a lot of work to further optimize our business and continue reducing debt.

This concludes our call for the third quarter of 2019. Thank you for joining us.

And I look forward to discussing our progress at our next conference call of the fourth quarter of 2019 or year-end 2019. We don't have a specific date at this stage, but it will be more likely than the end of February, early March.

Again, thank you very much. And have a great weekend.

Bye-bye.